Global leaders discuss U.S., European debt

ECB to make decision on Italy bond purchases Sunday to limit debt

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Global policymakers held emergency talks Sunday to discuss the first-ever downgrade of the U.S. government’s top-tier credit rating by Standard & Poor’s and the euro-zone debt crisis in Europe, according to media reports.

The discussions came after S&P lowered the U.S.’s triple-A rating on the U.S. to AA+ late Friday, saying its confidence in the U.S. government to bring its fiscal house in order had been reduced. That move followed protracted political bickering in Washington over raising the U.S. borrowing limit and an 11th-hour compromise agreement among Republicans and Democrats in Congress and President Barack Obama.

Stocks plunged around the Middle East on Sunday as most markets in the region opened for a new week of trading following the S&P downgrade. Trading in the Middle East was the first since the downgrade, to be followed in hours by Asian and European markets.

Financial officials from the Group of 20 major economies reportedly held emergency discussions Sunday and considered proposals to minimize shocks to the global marketplace.

U.S. policymakers participated in these talks, according to a government official familiar with the discussions. She said it was unclear whether leaders will issue a statement later Sunday.

In addition, the European Central Bank reportedly held a meeting Sunday evening to discuss whether to start buying Italian debt in an effort to calm the markets, according to reports.

Ajay Rajadhyaksha, head of U.S. fixed-income and securitized-products strategy at Barclay’s Capital, said the U.S. downgrade isn’t systemic.

“In the near term I just have a very hard seeing this [US debt downgrade] have a big impact on the U.S. fixed income markets,” he said. “Sentiment certainly, but I don’t see any forced selling of U.S. Treasuries, I do not see money market funds unwinding. I don’t see this as a systemic risk. If you want systemic risk go look at Europe.”

A bank trade association in Washington, D.C. expressed concern about the impact of the downgrade on debt and equity markets Monday. Christopher Cole, a vice president at the Independent Community Bankers of America, said bankers are concerned about possible further downgrades for municipal and state debt in addition to the impact of the downgrade on equity markets.

Japan and South Korea reportedly said they were still confident in U.S. Treasuries despite the downgrade, according to a report by Reuters. China reiterated its concerns about the U.S.’s rising debt and the dollar’s status as the world’s reserve currency, according to a Dow Jones report.

Investors are also looking to the Federal Reserve to adopt further quantitative easing — pumping money into the American economy, but critics argue it will add to make inflationary pressures in the U.S.

Rating agency criticism expands

In Washington, two senators on Sunday blamed each other’s political party for the downgrade. Sen. John Kerry, a Democrat from Massachusetts, dubbed it the “tea party downgrade,” in an interview on NBC. He insisting that a minority in the House of Representatives made it impossible for Republican and Democratic leaders to strike a bigger deal that with significantly more cuts that would have avoided a downgrade.

Congress on Aug. 2 approved legislation that increases the U.S.’s $14.3 trillion debt limit by up to $2.4 trillion in two stages, and by the Congressional Budget Office’s tally, reduces deficits by $2.1 trillion over a decade.

Kerry argued that lawmakers were prepared to do a bigger deal.

“This is the tea-party downgrade because a minority of people in the House countered even the will of many Republicans in the United States Senate who were prepared to do a bigger deal, to do $4.7 trillion, $4 trillion, have a mix of reductions and reforms in Social Security, Medicare, Medicaid, but also recognize that we needed to do some revenue,” Kerry said

Sen. John McCain, an Arizona Republican, said much of the dysfunction in the U.S. system comes from President Barack Obama’s failure to lead. McCain was Obama’s opponent in the 2008 presidential election.

“I would remind you that Republicans control one-third of the government. The Senate and the presidency are controlled by the Democrats,” McCain said on NBC TV. “And the fact is that the president never came forward with a plan. Now, I was gratified to hear that he had plans, but there was never a specific plan. There was always the so-called “leading from behind.”

U.S. lawmakers in Washington and European officials have expressed outrage about the downgrade late Saturday, arguing that S&P made errors in its calculations.

Rating agencies have come under stinging criticism for their role in the 2008 financial crisis. Many of the leading firms gave their highest ratings, such as the coveted AAA, to mortgage securities packaged from subprime loans. Such loans were extended to borrowers deemed to be at high risk of default.

“I find it interesting to see S&P so vigilant now in downgrading the U.S. credit rating,” Sen. Bernie Sanders, a Vermont independent, said Sunday. “Where were they four years ago when they, and other credit rating agencies, helped cause this horrendous recession by providing AAA ratings to worthless sub-prime mortgage securities on behalf of Wall Street investment firms?”

According to The Wall Street Journal, European Central Bank President Jean-Claude Trichet called for an end to the “global oligopoly” of the three main agencies, adding that the raters actions amplify market volatility.

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